Signs Indicate Some Investors Losing Faith
There’s always a point in a Roadrunner cartoon when Wile E. Coyote’s Acme rocket runs out of fuel and he sits frozen for a long moment in midair.
But he never actually starts to fall until he looks down.
Investors, like poor Wile E., finally may have started looking down.
Signs are growing that the collective mood of individual investors has turned more pessimistic in recent weeks, as the stock market has slid from its highs in mid-July, market watchers say.
Such pessimism is hard to measure precisely, and may be reversed with some positive news, of course. But the hesitant mood, if sustained, could finally result in the long-feared bear market.
Indeed, many experts say, the fundamental difference between bull and bear markets simply boils down to investor psychology--whether investors have enough faith in the market’s future to continue bidding stock prices higher, or whether that faith is so shaken that they choose to dump stocks or at least refrain from buying.
In other market downturns of recent years, investors were quick to jump in and buy stocks after they had fallen. That “buying on dips” resulted in stocks quickly regaining lost ground and setting new record highs.
But this time, experts say, evidence suggests that many investors may be more reluctant to jump back in. Several major mutual fund companies say purchases of stock funds have slowed markedly, while sales of the more-conservative bond funds have jumped sharply. In addition, wide sectors of the stock market that normally are popular among small investors are actually down sharply so far this year. And although many individual investors say they are not selling, they add that they are not buying either.
Perhaps typical of this sentiment is Anita Hunter, an active member of an investment club that meets once a month at a church hall in New York City. About three weeks ago, she sold a few stocks that suddenly felt risky. And although a lot of stocks look like bargains after the recent market drops, she can’t bring herself to buy.
“I haven’t bought a damn thing lately,” she said. “The reason is all this screaming and carrying on I see on CNBC every day. I feel as though the market is being moved by forces that are larger than reason--a lot of computer-program trading and that kind of thing. I feel like if I make any move I’m going to be swept away.”
Also, although many small investors say they are not planning to sell stocks because of the latest downturn--under which the Dow Jones industrial average has lost 9.4% from its record high on July 17--a fall of 20% or more could change that.
The apparent shift toward greater pessimism may stem from the fact that unsettling developments in the world economy seem to keep repeating, experts say.
Among those developments: The Asian financial crisis is deepening. President Clinton’s legal problems are getting thornier. More and more corporations are announcing disappointing profits. All of this has been going on for months--nearly a year, in the case of Asia--and may finally be taking its toll on investors’ psyches.
“One of the key rules of market corrections is that they feed off of old stories,” said Kenneth L. Fisher, founder and chief executive of Fisher Investments in Woodside, Calif.
To be sure, stocks could still recover from this latest downturn. Even if investors are more wary of stocks, there are still not many other investment alternatives that look more attractive. And many small investors still profess to be long-term oriented--suggesting that they will be willing to ride out short-term market movements.
Certainly, individual investors have been a stabilizing influence on the market through the most recent turbulence.
Hewitt Associates, a benefits consulting firm that recently began tracking how individuals invest their 401(k) retirement dollars, has discovered that although stock market volatility does increase the amount of switching among various investment options, the vast majority of people stay put.
Only about 1% of the 1.4 million investors monitored by Hewitt’s index do any switching at all, spokeswoman Monica Gallagher said.
Typical of that mind-set is Linda Kung, a 26-year-old Los Angeles environmental consultant who has most of her assets in stocks and claims to be “in it for the long run.”
“It’s all very interesting to watch the Wall Street jitters, but it doesn’t really matter at this point,” Kung said.
But at least a few things are different about investors’ recent behavior compared to last fall, when it took the stock market only a month to regain all the ground it had lost during a four-day, 11% slide that climaxed Oct. 27 in a 554-point plunge in the Dow.
This time, for example, there is an unsettling split between the most popular blue-chip stocks and the silent majority of smaller issues, as investors crowd toward the stocks that seem safest.
The Dow and the S&P; 500 have slid less than 10% from their peaks, but those popular averages mainly reflect the stock performance of such corporate giants as General Electric Co., Microsoft Inc. and Coca-Cola Co.
The Russell 2000 index of smaller stocks, representing a far broader cross-section of the market, is down 18.6% from its April 22 high point, and many individual stocks are down 30% or more.
Another indication that things are different now is that money isn’t flowing straight back into the stock market after every dip.
A big rally in the U.S. Treasury bond market Tuesday was the latest sign that investors are flocking to bonds as a haven from stock market fluctuations. In the first seven trading days of August, investors have poured $400 million into the $21-billion PIMCO Total Return Fund, the world’s largest bond mutual fund, said William H. Gross, founder of Pacific Investment Management Co., which runs the fund.
“I don’t know if I’ve ever seen that big a flow in such a short time,” Gross said Tuesday, adding that the rush of money makes him worry that investors have forgotten that bonds can be volatile too.
Meir Statman, a finance professor at Santa Clara University who studies investor psychology, said people create mental frameworks to help them rationalize the swings of the stock market, which he called “the most perfectly random machine ever created.”
When the market drops suddenly, he said, investors immediately say they saw it coming.
“I have been psychologically preparing myself for a 20% to 25% pull-back,” said Boris L. Seidel of La Canada Flintridge. “Our equities are probably down 10% from their peaks, so I’m not panicking. If I had made it home early enough today, I probably would have bought a little.”
A lack of good options is keeping Nat Motta, an 84-year-old Pasadena resident, in the stock market.
“If I sell a stock, I am going to have to pay tax on the profits because I am a long-term investor and everything I own has gone up in value. If I sell, what am I going to be able to buy after paying the tax?” Motta asked.
Mulligan reported from New York and Kristof from Los Angeles.
